How Congress Encourages Shortages of Cancer DrugsBy John R. Graham | August 31, 2013Also published in Forbes on Sat. August 31, 2013

2011 and 2012 saw a quickening of interest in the deadly problem of acute shortages of injected drugs, especially those targeting cancer. Drugs defined as being in short supply by the Food and Drug Administration (FDA) increased from 61 in 2005 to more than 250 in 2011. Since reforms passed Congress thirteen months ago, the problem has gotten 20 percent worse.

These injected drugs are usually administered by specialist physicians as chemotherapy, and are usually produced by generic drug-makers. They differ from medicines sold as tablets in pharmacies in that they are manufactured from living things, such as bacteria. Because these injected drugs can be infectious or poisonous in their natural state, they require a high degree of quality and care in their manufacturing, storage, and distribution. They share these characteristics with vaccines, which are often made by the same manufacturers, such as Sanofi (NYSE:SNY).

The crisis led President Obama to issue an Executive Order in October 2011, which increased the Administrations control over the pharmaceutical supply chain. The Executive Order asserted powers that were not clearly contained within the law at the time. Unlike today, when the Administration unilaterally amends Obamacare to delay the employer mandate or allow Congressional staffers subsidies for Obamacare coverage, in those days President Obama appreciated the need to ensure his newly claimed powers were legal.

He urged Congress to amend the law via the FDA Safety and Innovation Act (FDASIA), which passed in July 2012. FDASIA included two major changes. First, generic drug-makers accepted that they should pay the FDA user fees to have their applications processed. This was supposed to improve the agencys performance in approving new generic drugs. Also, the industry succumbed to the FDAs demand that manufacturers facing a disruption in production warn the FDA six months before the disruption occurred. This was supposed to allow the FDA to speed up approval of alternative manufacturers.

At the time, I wrote a 16-page report, which concluded that FDASIA would do little to improve the situation, and proposed other solutions. Unfortunately, my skepticism proved correct. Over one year later, the FDAs new powers have not relieved cancer patients from these shortages of necessary medicines. In 2012 and 2013, the number of drugs in short supply has hovered around 300, a deterioration of about 20 percent.

The fundamental reason for FDASIAs failure is that it increased the power of the FDA, when it should have decreased it.

The possible causes of drug shortages can be categorized as supply-side or demand-side. Supply-side factors include physical constraints due to remarkably high standards in the chain of production and in the distribution of these potentially very dangerous products. Similar constraints apply to the acquisition of the drugs active ingredients.

Another key supply-side factor is an unproductive FDA, which has increased its regulatory burden on current suppliers and made it very difficult to get approval for new generic medicines and manufacturing facilities. This regulatory overreach has likely reduced the ability of competitors to react to shortages by entering the supply chain.

Potential demand-side factors include government-dictated rebates or discounts for programs such as Medicare, Medicaid, and the 340B program. The federal government established 340B in 1992 as a way to reduce prices of drugs for inner-city hospitals that serve a disproportionate volume of indigent patients.

Eligible hospitals enjoy a government-dictated discount of 25 percent to 50 percent off the regular price. As described by Forbes contributor Scott Gottlieb, MD, of the American Enterprise Institute, one third of the nations hospitals now profit from the scheme, including rich ones like Cedars-Sinai in Los Angeles and Duke University in North Carolina.

Further, according to Dr. Gottlieb, hospitals do not pass this windfall on to patients or the government. Rather, they use the excess profits to acquire oncology practices. As a result, there has been a dramatic increase in the proportion of chemotherapy administered in hospitals rather than more convenient and less expensive oncologists offices.

FDASIA does not address any of these issuesand Obamacare makes them worse (by increasing the number of hospitals which can profit from the 340B program, as well as the incentives for hospitals to acquire physicians practices).

A more promising approach would make it easier for competitors to enter the market in response to forthcoming shortages. Short term, American patients should be freed to use injected drugs authorized by regulators in other developed countries, as long as they are so labeled. (Acute shortages tend to occur only in the U.S. and Canada, not Europe.)

Long term, the FDAs regulations on manufacturing should be limited to setting standards and measuring outcomes, rather than specifying every step of the manufacturing process. Instead of a bureaucratic monopoly, the FDA should be transformed into a certifier of certifiers, permitting qualified third parties to approve new facilities and earn some of the user fees currently harvested by the FDA. This regulatory competition will increase the supply of crucial medicines, while lowering prices.

There is a residual risk that government-dictated discounts on injected drugs will compromise supply by making it unprofitable to manufacture them. This risk can be mitigated by developing a plan to shift the Medicare reimbursement for certain injected drugsespecially for cancerfrom the Medicare Part B program to the Part D program.

This reform would face stiff resistance from oncology executives in the pharmaceutical industry, who practice a business method called selling the spread. This means that drug-makers charge oncologists less for the drugs than the oncologists then claim from Medicare. However, Medicare is squeezing this practice anyway. In Part D, drug-makers negotiate terms with private insurers, rather than react to government-dictated prices. These businesslike negotiations are more likely to generate prices that adequately reimburse manufacturers while keeping Medicare expenditures under control.

FDASIA is failing to stop shortages of injected drugs. Congress should consider alternative reforms without delay.

John R. Graham is a former Senior Fellow at the Independent Institute.